Know the difference between gifts and compensation

When payments are made in return for goods or services, that payment should be considered income to the recipient, not a gift. For example, if you give a favorite employee a big check at Christmas, you might consider it a gift, but the IRS will likely consider it income. That could be true if the employee and owner were family. In one case, the IRS said payments to an owner’s daughter (who was an employee) were for past services, not a gift.